Hong Kong property market smashes 1997 and 2015 highs

There is some concern in the Far East regarding Hong Kong property prices which have now smashed through their previous record levels reached in 1997 and 2015. A recent new property development prompted literally hundreds of people to queue for the chance to acquire a unit and these images were splashed right across the online and off-line media. In some ways it is this image which has prompted concerns about the short to medium term outlook for Hong Kong property.

Record property prices

Despite the fact that property prices in Hong Kong have reached record levels there is still great demand for homes across the region. Those queueing at a recent property development sales day seemed unperturbed by the fact that mortgage rates had been increased just the day before. There is no doubt that these images are reminiscent of 1997 and 2015 but the situation in Hong Kong is very different today.

The quasi central bank of Hong Kong has been expressing concerns about property price levels but these concerns are currently being drowned out by renewed enthusiasm for Hong Kong property. Historically, in a similar situation, you could argue that this unbridled enthusiasm was verging on reckless but let’s take a look at the economic situation which would appear to support long-term property investment.

Economic statistics

If we compare May 2017 to June 1997, one of the previous peaks in Hong Kong property prices, this will perhaps put the ongoing demand for Hong Kong property in perspective. Deposit interest rates in 1997 were 5.95% against 0% today, inflation was 5.6% compared to 1.4%, Hong Kong GDP growth was an unsustainable 7.5% against a more modest 4.3% today, unemployment was 2.1% against 3.2%, the loan deposit ratio was 109% against 76% and perhaps more importantly, mortgage rates were 9.6% against 2.15%.

If we look at some of these figures in isolation we see that there is absolutely no benefit from holding funds on deposit where you are earning 0%. We have seen a similar situation in the UK where rock bottom savings rates have encouraged people to look elsewhere for their long-term returns. Inflation at just 1.4% against 5.6% would suggest that the economy is not overheating at the moment and therefore steady GDP growth in the medium term is more likely than an economic crash. Thankfully, in line with other countries around the world, the Hong Kong authorities have also clampdown on 100% mortgages which leave very little headroom in the event of a market correction.

Loan to value ratio

The loan to value ratio at the moment is between 40% and 50% which means that if property prices were to fall by up to 50%, in a worst-case scenario, the vast majority of homeowners would not be plunged into negative equity. As we all know, negative equity has a major part to play in property market crashes because as finances are squeezed, more and more people are unable to afford their mortgage payments forcing them to sell their homes at literally any price.

Nobody is ruling out a short-term correction in Hong Kong property prices, because the current rate of growth is unsustainable, but those doom and gloom merchants forecasting a house price crash are missing the subtle differences in the economic situation today.